Fintech: A Revolution or a Transitory Hype?

253 Pages·2022·8.479 MB·English

by  Imad A. Moosa

Fintech
To Nisreen, Danny, Ryan and Ivy
Fintech
A Revolution or a Transitory Hype?
Imad A. Moosa
Professor of Economics, Kuwait University, Kuwait
Cheltenham, UK • Northampton, MA, USA
© Imad A. Moosa 2022
All rights reserved. No part of this publication may be reproduced, stored in a
retrieval system or transmitted in any form or by any means, electronic, mechanical or
photocopying, recording, or otherwise without the prior permission of the publisher.
Published by
Edward Elgar Publishing Limited
The Lypiatts
15 Lansdown Road
Cheltenham
Glos GL50 2JA
UK
Edward Elgar Publishing, Inc.
William Pratt House
9 Dewey Court
Northampton
Massachusetts 01060
USA
A catalogue record for this book
is available from the British Library
Library of Congress Control Number: 2022938901
This book is available electronically in the
Economics subject collection
http://dx.doi.org/10.4337/9781802206340
ISBN 978 1 80220 633 3 (cased)
ISBN 978 1 80220 634 0 (eBook)
EEP BoX
Contents
List of figures vi
List of tables viii
Preface ix
Abbreviations and acronyms xi
1 Fintech: what is in a definition? 1
2 The evolution and revolution of fintech 18
3 Functions and market structure 33
4 The technology 55
5 The benefits and costs of fintech 81
6 The war on cash 105
7 Cryptocurrencies: a revolutionary innovation or a scam? 138
8 The implications of fintech for financial stability and inclusion 162
9 The regulation of fintech 176
10 The fintech hype 197
References 210
Index 227
v
Figures
1.1 The frequency of Google search (Index 0–100, monthly
observations) 4
1.2 The frequency of Google search (Index 0–100, annual
observations) 5
2.1 Fintech evolution milestones 1830–1999 23
2.2 Fintech evolution milestones 2000–2020 24
2.3 Fintech sectoral innovations 29
2.4 Innovative market support services 30
3.1 Line of business of world’s top 50 fintech companies 42
3.2 B2B and B2C products and services 43
4.1 Technology and output in finance 55
4.2 Feed-forward ANN 60
4.3 The components of artificial intelligence 62
4.4 Regtech applications 73
4.5 Recording of a new transaction on a blockchain 75
4.6 Centralised vs. decentralised databases 76
5.1 Technology in the production function 82
5.2 Capital-deepening technology 102
6.1 Proportion of cash payments (%) 130
6.2 High scores of means of payment on 11 criteria (smiley face) 132
7.1 The dollar price of bitcoin (daily observations, 0 = 19/08/2016) 147
vi
Figures vii
7.2 Index of the bitcoin price of a commodity 154
9.1 Regulatory response to fintech risks 189
9.2 Mapping of regulatory responses to fintech activities 192
Tables
1.1 The frequency of Google search (Index 0–100) 4
1.2 Selective definitions of fintech obtained from a Google search 9
1.3 Definition/description of fintech in popular media 12
1.4 Reference of definitions to fintech characteristics 15
2.1 Growth rates of Fintech start-ups 21
3.1 Examples of the activities of fintech companies 35
3.2 A brief description of the terms associated with products
and services 44
4.1 AI applications 57
4.2 The use of big data 65
4.3 Examples of Regtech companies 74
4.4 Potential applications of blockchain technology 77
5.1 Challenges and benefits of fintech start-ups 85
5.2 Operational loss events relevant to fintech 96
5.3 Sources of operational risk relevant to fintech 97
7.1 Peaks and troughs in the dollar price of bitcoin 148
9.1 Examples of failed fintechs 186
10.1 Ranking of top inventions 203
10.2 Classification of claims in favour of fintech 207
viii
Preface
The word “fintech” (short for “financial technology”) has become a house-
hold term, and not just a word that is used in academic journals. The popular
media often publish stories about fintech and how emerging small firms
utilise state-of-the-art technology to change the world of financial services.
However, the word “fintech” means more than one thing. In one sense it refers
to technology per se, the technology used by financial institutions to provide
financial services. In this sense, fintech is not a new phenomenon but rather
a phenomenon that goes back to the 19th century or even earlier, which means
that it is better to use the full expression “financial technology”. However,
the word is used more appropriately to refer to the industry, the collection of
financial institutions using technology to provide financial services. In this
broad sense, the industry includes already established financial institutions and
the emerging firms that compete with them. In a narrow sense, “fintech” refers
to emerging firms that compete with traditional financial institutions and aim
to disrupt them by providing better-quality and cheaper financial services. The
emergence of these firms creates regulatory problems, as they bring with them
costs and benefits.
This book is mainly about the fintech industry in a narrow sense. Confusion
arises because (as we are going to see in Chapter 1) fintech is defined in so
many ways that any definition may refer to the technology, the industry in
a broad sense or the industry in a narrow sense. In Chapter 2, we look at
the historical evolution of the technology used in the provision of financial
services, which has led to the emergence in the 21st century of the fintech
industry in a narrow sense. The question of whether fintech is an evolution
or a revolution is also examined. In Chapter 3, we look at the structure of the
fintech industry in both a broad and a narrow sense. The types of technology
used by financial institutions are examined in Chapter 4, where it is argued
that the term “financial technology” may be flawed because the same types
of technology are used in other sectors of the economy. It is even argued that
these technologies contribute more to human welfare when used in sectors
other than finance where the contribution is simply some sort of extravaganza.
Chapters 5, 8, 9 and 10 are about the fintech industry in a narrow sense, as the
discussion leads to the inevitable conclusion that fintech is a transitory hype.
In some cases, fintech is a source of scam—nothing exemplifies this better
than the hype and scam of cryptocurrencies, which is the subject of Chapter
ix